Davis Co. v. Commissioner , 6 B.T.A. 281 ( 1927 )

OPINION.

Milliken :

The first issue questions the correctness of the respondent’s action in adding the reserve for losses and repairs to milk cans to petitioner’s income. The record shows only that such losses were substantial over a period of years and that the amount collected in 1920 for the use of cans was not included in income but was set up as a reserve to cover the losses. Only losses sustained within the taxable year are deductible. Appeal of Hanff-Metzger, Inc., 4 B. T. A. 1214, and cases there cited. As we are unadvised as to the extent of such losses sustained within the taxable year in question, we must sustain that portion of the deficiency resulting from the addition of the amount of the reserve to taxable income for the year.

The two remaining points concerning the proper treatment to be accorded the proceeds from the alleged forced sale and from fire insurance policies on property destroyed, present questions requiring an interpretation of section 234(a) (14) of the Revenue Act of 1921, which provides as follows:

(14) If property is compulsorily, or involuntarily converted into casli or its equivalent as a result of (A) its destruction in wliole or in part, (B) theft or seizure, or (0) an' exercise of the power of requisition or condemnation, or the threat or imminence thereof; and if the taxpayer proceeds forthwith in good faith, under regulations prescribed by the Oommissioner with the approval of the Secretary, to expend the proceeds of such conversion in the acquisition of other property of a character similar or related in service or use to the property so converted, or in the acquisition of 80 per centum or more of the stock or shares of a corporation owning such other property, or in the establishment of a replacement fund, then there shall be allowed as a deduction such portion of the gain derived as the portion of the proceeds so expended bears to the entire proceeds. The provisions of this paragraph prescribing the conditions under which a deduction may be taken in respect of the proceeds or gains derived from the compulsory or involuntary conversion o£ property into cash or its equivalent, shall apply so far as may be practicable to the exemption or exclusion of such proceeds or gains from gross income under prior income, war-profits and excess-profits tax Acts.

An involuntary conversion under the statute may result only from the three specified causes. The contention that the alleged forced sale was such a conversion can only look to the cause last enumerated for support. Can it be said that a sale, made at the request of the local chamber of commerce, results from the exercise of power of requisition or condemnation or the threat to exercise such power? No doubt, the appeal made by the local body was a most earnest and urgent one. Sufficient pressure was brought to bear to lead petitioner to the conclusion that it must comply or suffer the diminution of the good will it had built up in the community. The petitioner knew that it could not be coerced by legal means into making the sale, as the power of requisition or condemnation did not exist. However, the exercise of such power, or the imminence thereof, is essential to an involuntary conversion, due to the cause under discussion. The sale was made because it was deemed to be good business policy. We are unable to see that the sale was made by reason of the exercise of the power of requisition or condemnation or the imminence thereof within the contemplation of tlje statute.

We come, then, to a consideration of the proceeds from the fire insurance policies on the equipment destroyed in August of 1920. The respondent contends that there was no involuntary conversion within the meaning of the statute, for the new equipment was not acquired immediately, the acquisition being delayed until after the building had been completed in 1921. Under the facts in the instant case we think the contention without merit. After the fire the petitioner was without suitable quarters to house its plant, and the evidence is all to the effect that the construction of the new building was begun and completed without delay. The new equipment was purchased and installed as soon as possible.

The respondent also urges that the new equipment had a capacity in excess of the capacity of the equipment destroyed. In the Appeal of Cotton Concentration Co., 4 B. T. A. 121, we considered the effect of a slightly increased capacity in similar property acquired. We held in that case that a slight variance in capacity was not fatal to the deduction allowable under the involuntary conversion provision. We think that decision disposes of the respondent’s contention in the case at bar. The deduction is such part of the profits — $4,764— as the part of the proceeds expended — $4,492—bears to the net proceeds — $8,892.

Judgment will be entered on 15 days' notice, under Rule 50.